If you are creating a five year financial projection, test it with some “sanity checks” such as the revenue per employee (RPE) benchmark.
The calculation is pretty simple: divide your annual revenue in any given year of the projection by the average, or yearend, number of employees for that year. Don’t worry too much about the exact number. This is a sanity test to make sure you have not projected a dramatically low number of employees in the future for the revenue you plan to achieve.
Business Insider wrote an extensive analysis of large companies and their revenue per employees. Here are a few important takeaways:
Revenue Per Employee Varies By Industry
As shown on this chart, energy companies (oil and gas) on average have almost six times the revenue per employee of industrial manufacturing companies. You should use the big companies in your general industry as a benchmark to perform your own sanity check on your projections.
Revenue Per Employee Varies By Company
This chart translates Business Insider data into something easier to understand visually. As you can see, large tech companies vary rather dramatically by this metric.
The analysis also shows that Revenue Per Employee can change somewhat over a short period of time.
If your remove these 20 outliers from the 500 companies analyzed, you can see that Revenue Per Employee stayed +/- 20% within a two year span of time.
Translating that into your analysis: make sure your RPE doesn’t change too dramatically as you grow.
The symptom of crazy RPE numbers often indicates that founders don’t fully understand what it will take to scale their business. More employees will be needed for customer support, marketing, and operations as you grow revenue.
And often these employees need to be hired ahead of revenue growth to ensure their capacity is ready when the level of business needs it. Hiring people early during a period of rapid growth will tend to make your RPE lower than the large, stable companies listed in the above charts.
Investors will be checking your RPE to see if you understand scaling. So make sure you check it first!